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Investment outlook: Place your bets

Written by Susanne Ruder

Global meltdown, bear market, jittery investors, recession. The tide of bad news just seems to keep swelling. So what’s an investor to do? PROFIT asked financial and economic experts to dust off their crystal balls and make predictions for 2009. While there are no guarantees when it comes to financial market predictions, it’s pretty safe to say the wild ride is far from over. So, fasten your seatbelt, and get back to basics.

“There’s no doubt that 2009 is going to be an exceptionally challenging year,” says Warren Jestin, senior vice-president and chief economist for Scotiabank. “Market volatility, sudden downdrafts and occasional soaring in the equity markets or even the currency markets. I think they’ll be around for a while.” Investors would do well to take a cautious, long-term approach to managing their money over the next six to nine months, says Jestin: “I think the stretch will probably be into mid-year before we really start to see signs of recuperation, and that recuperation is going to be very, very lethargic.”

While commodity prices have already dropped sharply since mid-2008, there’s still room for some downward momentum. “They’ll likely languish for a while,” says Bob Gorman, vice-president and chief portfolio strategist for TD Waterhouse.

And that means the loonie should drop as well. “Over the next six to nine months,” says Jestin, “the challenges that we’re facing suggest that the currency will stay below the US90¢ threshold, probably in the range of US80¢ to US85¢, and we may even see it back in the 70s again.”

Some relief may come with Democratic control of the White House and U.S. Congress. Indeed, the U.S. economy will probably receive a larger stimulus package than if a Republican administration were in power, says Paul Taylor, senior vice-president and chief investment officer for BMO Harris Private Banking. That may be enough, he says, to right the good ship U.S. and, in turn, have a positive effect on all that we export, including autos, base metals and energy. “Overall,” says Taylor, “equities are unjustifiably low, from a valuation standpoint, right now. We’ll likely see higher prices 12 to 18 months out from now.” In other words, there are good buying opportunities among North American stocks.

On the international front, “Europe and Japan have had an absolutely miserable year,” says Gorman. “Prices of stocks are very, very low, and in Europe the dividends are approaching 4% or so. So, valuations are getting to the point that they’re pretty compelling.” For mutual-fund investors, he says, “international equity funds over the coming year will probably do fairly well, coming off a very low base.”

In emerging markets, particularly China and India, adds Gorman, “the valuations are certainly getting much more attractive, and we’re probably going to have a great buying opportunity sometime over the next year. But I still think it’s a little early.”

“It’s not time for bold action,” says Taylor. “Instead, return to the tried-and-true basics of investing.” Avoid trying to time the market, and ensure that your portfolio is aligned with your personal circumstances, including your investment goals, risk tolerance and time horizon. “There’s been a tendency over the past few years to become more aggressive than one intended,” says Taylor. “In the current environment, of course, the difficulty is a tendency to be more conservative than is consistent with one’s longer-term time horizon.”

There are plenty of investing opportunities, but be choosy. “It’s not a time to own companies that have leveraged balance sheets,” says Taylor. “Financing in the current environment is going to be very difficult, regardless of the profile and pedigree of the firm involved. So, definitely emphasize firms with balance-sheet strength.”

His advice? Periodically buy a few names, and then sit back. If the bottom doesn’t fall out of the economy again, buy a few more. “Gradually move money back into equities over the next couple of quarters to four quarters.”

Typically, companies that hold up well in this environment are the large-cap growth stocks with consistent sales and earnings. Gorman cites Oracle, Johnson & Johnson, Encana and Suncor as good examples. Start thinking of yourself as a pension fund, which typically limits equities to between 50% and 60% of its investible assets, he says: “That will generally provide you with a pretty good return over time without stomach-churning volatility.”

Bottom line: the watchword is caution. “You want companies with strong balance sheets, conservative management, diversification in markets, and you want a long view,” says Jestin. “You don’t want to knee-jerk react in this market.”

Originally appeared on PROFITguide.com